Watch out for local enterprise software firms

New Delhi, Feb. 24 -- The last decade has seen the consumer Internet sector hogging the headlines, all the excitement, and most of the capital in India. What is less known, though, is the quiet revolution brewing on the leeward side of the start-up mountain-that of enterprise software companies being built, quietly and largely without fuss, and with solid models underpinning sustainable businesses that are eager to take on the world. These firms are almost a mirror image of the consumer Internet sector. Here's why
1.They are truly innovative companies, building solutions for Indian problems and scaling them to other emerging markets, and increasingly to mature markets, with increasing success. It is relatively difficult to find western copycats, but those solving local problems are many. Largely mobile-first platforms, they are engineered to thrive on India's notoriously poor mobile networks and work on the most inexpensive, lower-end Android phones. Some are even creating 'slim' versions for feature phones. Consider CRMnext and Winit as two examples. Or Beacon Services that is solving distribution-related challenges for FMCG companies. Or the Internet of Things (IoT) companies such as LoudCell that helps make diesel gensets more efficient.
2.They are capital efficient and disciplined in their operations. The typical Series A capital raise is $3-5 million, and only a few have crossed the $100 million mark: Freshdesk and Druva are cases in point. However, instances of globalizing companies abound. The biggest emerging success story is coming out of Chennai: watch out for Zoho. It is still bootstrapped, and though reliable numbers are not available, their revenue run rate is estimated at north of $250 million annually. The big daddy, though, is most certainly Tally-the ubiquitous accounting software for small and medium enterprises (SMEs), which even overcame the efforts of the mighty Tata Consultancy Services Ltd (TCS) to invade its space through iON. (iON has since then morphed into a very successful testing and education services platform).
3.Lean organizations are the order of the day. Relatively small engineering teams build products, with costs often made variable through smart outsourcing of non-core development (and other activities). The sales processes are usually driven by the founders themselves, and the business value chains are linear. The lack of complexity enables agile operations, fast versioning and rapid scale up and scale out of operations when the time is right. A company with a $10 million revenue run rate will typically have less than 100 employees.
4. Marketing costs are kept at sensible levels. Not for them the paradigm of high "customer acquisition" costs, "investments in market education" and the like. Investments are limited to digital marketing for awareness, proof of concepts and at-cost or free pilots. To some extent, this is the nature of the business they are in: there is no need to attract and acquire millions of customers. Marketing costs tend to be less than 2-3% of the revenue.
5.They are competing with global giants such as Salesforce.com, SAP AG, Oracle Corp., and many others, with huge success. Their wins, as IDC research has established, are not simply on the back of lower costs, though it is a factor. Large companies in India, for example, are using them 50% of the time when they leverage external partners for digital transformation programmes: these successes are possible because of superior value propositions and capabilities, with lower price points being the icing on the cake. Manthan Systems, Capillary Software and FarEye (Declaration: I mentor this company as an Indian Angel Network representative) come to mind here. They are competing, and they are winning, in the stormy seas of global competition.
If you're a chief information officer or a technology buyer, be sure to consider this community as a viable option when you're looking for new software platforms.
If you're an angel or institutional investor, you will be well served by examining this sector closely. There are many interesting opportunities available at sensible valuation expectations.
If you're part of an American/global MNC software product house, watch out. These companies are formidable competitors. Ignore them at your peril.
If you're in the IT services space, partner with them for mutual benefit. They can add muscle to your platforms at relatively low cost, and they will be willing partners because they need your global scale and reach.
Finally, if you are a technology industry watcher, I trust you're already all over this sector.
The era of super success for the IT services companies is over-with or without Trump. Technology shifts and business model changes have created a structural challenge which the industry is hard pressed to overcome. India will see the next wave of successes coming from enterprise software companies as they scale and globalize.